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Let it be a year of correction, I will keep expectations low: Raamdeo Agrawal

"From banking side, expect negative surprises in Q4. Despite deep value, it's a falling knife now."

Mar 12, 2018, 08.23 AM IST
ET Bureau
"The US is trying to do is something which is like making Indian PSU banks blue chips. "
Markets are not necessarily headed down only but as valuations are stretched, it would be prudent to keep low expectations, said Raamdeo Agrawal, joint MD at Motilal Oswal Financial Services. In an interview to Sanam Mirchandani and Nishanth Vasudevan ahead of the Motilal Oswal Eureka conference in London, Agrawal said there are several positive economic triggers ahead.

Edited excerpts:

Markets have corrected 9% from all time high levels. Is the worst of the selling over?
I don’t think so. In the short term, it is anybody’s call. There are political challenges in the next 12 months. We have some state elections before the grand finale (general elections), hopefully in May or maybe earlier. Maybe at some point of time, markets will get so used to it that they might say enough is enough and take their own course. One fundamental difference is that this kind of flow of money from domestic side has never happened. There is no impact of 9% correction of the commitment. In fact, I see clients getting more aggressive to subscribe, which is a very good sign. It is not necessary that market is headed one way down, particularly for the companies which are doing well. But because of valuations being little stretched, I would think that let it be the year of correction, forget about the fortnight of correction. I would keep very low expectation from the market-minus 10%, plus 10%.

Domestic flows have not been challenged in the last three years. If this is a year of correction, could these flows be tested?
The moment markets correct by 10-12%, there is lot of money sitting on the fence. If it corrects 10% from here, a lot more money will come. Ray Dalio has said that next 10 years belong to India. So net-net allocation to India will not reduce. We have wonderful companies, just that they are a little expensive. If they are a little expensive, there are two ways to correct — time wise or price wise. It could be a combination of both or it can be a vertical correction price wise.

In PSU banks, the market thought that last year was the worst and now we have seen PNB fraud case. You held SBI in your portfolio earlier. What’s your view now?
We have sold SBI. I am not expecting this kind of thing in any other bank. It is very bank specific or branch specific. Now, so many circulars have come, so in what shape, what has to be provided from contingent liability, only the March quarter result will tell.

What will make you bullish on the structure of PSU banks?
You need big therapy. You need out-of-the-box thinking. It is something very doable. You have to repair the management. Till 2005, private sector was small. Till 2002-2003, PSUs used to create 40-50% of wealth and 30-40% used to be by MNCs. Now, everything is private. It is a festival of private entrepreneurship.

Do you expect more negative surprises in the March quarter?
From banking side, yes. At some level it (PSU banks) is a deep value. But it’s a falling knife now. We don’t know how much it will fall. We know that as the economy recovers, banks also recover.

Are we coming to a policy-paralysis situation where banks will refrain from lending?
It is indirectly paralysis in banking, at least in PSU banks. Of course, it throws up a huge opportunity for private sector banks. That’s also the case and they are no more small. So, how much slack they can take is one thing, but you cannot allow PSU banks to die.

What do you think of trade war concerns?
This has huge repercussions. They want to revive manufacturing in the US. Now, the US is trying to do is something which is like making Indian PSU banks blue chips. They have given up steel making, manufacturing and textile. Now, they want to revive it. And that too they want to use the tariff structure. This realignment could be very interesting, but painful. Trump is a businessman. So, they are doing it absolutely the hard way. He wants manufacturing jobs to come back. That is another big challenge and it will blow up in next 6-8 months. If global equity markets go down, its attractiveness will go down. It will become very risky. Volatility will go up.

Is sentiment completely risk-off for EMs as far as foreign clients are concerned?
Everybody is interested in India and Indian companies. The problem is valuation. So, the market must correct. Ultimately, only one engine cannot fly the market. There are three engines — earnings, global flows, and local flows.

What is the theme that you are looking forward in the next three years?
It is not about particular themes today. If GST works, this government is going to go all the way. That will change the tax to GDP and change the way the government spends. That can completely revive the economy and we can have a party for many years to come. Once GST is right, then the same people have to pay their direct tax also. Combination of these two will give me 1 or 2% more tax to GDP. There is a huge compounding effect.

Does the electric vehicle space interest you?
It is interesting but it is still some time way. As innovation gets deeper like solar, I am sure it will become much more mass produced.

TCS and HCL Technologies have been among your top wealth creators. Going forward, will IT be as big a wealth creator?
Intuitively, I think so. The headcount-driven model has gone. Digital will be there. So, technology has a role to play. Valuations are very cheap, lower than that of the index.

Is IT sector a crowded segment?
It is a fantastic opportunity. Their dominance has not gone anywhere. The need for technology is growing every day. The issue is whether the projects go to them or the new guys. If not them, then some other set of new companies will come but the sector will keep creating wealth.

What is your view on the telecom sector?
There is rivalry among incumbents. Actually it is a very unhealthy rivalry. We have not very put any bet. We are staying away.

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